Educational Articles

Convertible Terms You Should Know

Greg Brewer
| February 25, 2010

Travelers going to a foreign country usually try to pick up some of the language before they arrive. The same should be true for investors, as the language of certain markets is unique to those markets. Below are some key Convertible Bond terms:

Conversion Ratio: The number of shares of stock for which the convertible can be exchanged.

Conversion Value: The value of the convertible if converted into the common (i.e., the price of the common multiplied by the conversion ratio). Example: If the conversion ratio is 5.0 and the stock is $20, the conversion value is $100.

Premium Over Conversion Value: The percentage by which the price of the convertible exceeds the conversion value. Example: If the convertible price is 130 and the conversion value 100, the premium over conversion value is 30%.

Investment Value: The price at which the convertible would likely trade if it were not convertible. In other words, the price at which a “straight” (nonconvertible) bond or preferred stock of similar terms and maturity would trade.

Premium Over Investment Value: The percentage by which the price of the convertible exceeds its investment value. Example: If the convertible price is 130 and the investment value 65, the premium over conversion value is 100%.

Call Price: The price the convertible may be called at if it is callable. Note that when an issue is called, holders have a certain number of days to decide whether or not to convert.

“Hard Call” Protection: Most convertibles, at issue, will be protected from being called. “Hard call protection” means that the issue cannot be called for any reason during the specified period.

Provisional Call Protection: A convertible that has “provisional call protection” can be called only if the underlying stock rises to a specific price and remains at that price, or higher, for a specific number of days.

Coupon: The yearly interest paid on a bond. Bonds are almost always issued with a par value of $1,000, the price they will be redeemed at maturity. So, a 6% bond pays $60 in interest a year.